Trade liberalization and price-cost margin in Indian industries

Abstract

Using panel data for 137 three-digit industries for 1980/81 to 1997/98, the paper examines the effect of trade liberalization on price-cost margins in Indian industries. An econometric model is estimated to explain variations in price-cost margins, taking tariff and nontariff barriers among the explanatory variables. The results indicate that the lowering of tariffs and removal of quantitative restrictions on imports of manufactures in the 1990s had a significant pro-competitive effect on Indian industries, particularly concentrated industries, tending to reduce the price-cost margins. The paper notes that despite the pro-competitive effects of trade liberalization reinforced by domestic industrial deregulation, the price-cost margin increased in the post-reform period in most industries and aggregate manufacturing, which is attributed to a marked fall in the growth rate of real wages and a significant reduction in labor's income share in value added in the post-reform period, reflecting perhaps a weakening of industrial labor's bargaining power.